MAILBAG QUESTION:

"spx and dow were up on todays rally but stalled again in the same areas. what do you make of this? you commented on 1850 being a tough area in spx.

you wrote before on last bottoms as pull back percentages that could be guessed at. are there rules for this since bottoms versus highs were quite different for ndx versus spx and dow?

... do you have a regular schedule for your trader articles?"

MY RESPONSES:

Let me take the last question first. I've tried to write these articles on general trading 'principles' ONLY as the market has demonstrated certain predictable patterns based on trading principles relating to technical analysis mostly. This has led to a less than regular schedule for my Trader's Corner articles. I've decided that going forward I will schedule them, if not precisely weekly, more regularly, starting in March and pick useful topics from a trading perspective, whether precisely 'topical' or not. I'm traveling mid-March and there might be a small hole there.

CURRENT PRICE RESISTANCES:

Well, the S&P and Dow DID have good gains today but both have 'stalled' in terms of their Closes being under a cluster or prior highs. The S&P 500 (SPX) has not been yet achieved a decisive (i.e., Closing) penetration of 1850. While today's intraday high in SPX pierced 1850 by some margin, its all-important Close was back under this same line of resistance. There are often a number of cross currents in February and March that tend to make these months have lesser monthly gains or to struggle on a seasonal basis relative to other parts of the year.

The Market is in transition to more 'normal' influences involving economic growth (and after a very severe winter in the East and Midwest) and earnings expectations, versus actual reported numbers. I refer to more normal economic/earnings influences versus many prior months of Federal reserve money supply creation; i.e., with the Fed buying large quantities of bonds to keep long-term rates low. This has of course helped fuel a bull market in stocks. As this monetary stimulus is tapering off, there's what seems like a predictable stall in the stocks driven by more mainstream economic influences, especially by consumer driven influences. This, as opposed to the latest tech-driven wonder company.

I have been assuming that the S&P will see a decisive upside penetration of 1850 resistance, although it's hard to predict just WHEN. Bullish sentiment has not shot up strongly of late, which in a contrary opinion sense, is bullish. One reason of course for cautious bullish sentiment is the inability for SPX to forge to a decisive new high. The most money sloshing around in index and directed mutual funds goes into the S&P sector. I anticipate potential for a move to the upper end of SPX's bullish uptrend price channel but SPX could also trend sideways or have another dip ahead before that happens.

THREE (3) RETRACEMENT RULES OF THUMB

I'll make this as simple as possible with 3 patterns that tend to occur repeatedly in stocks and the major stock indexes:

1. The strongest stocks or indices, in terms of their prior rate of gain, will tend to see the LEAST pullback on a percentage basis; as measured from the last downswing low to the last upswing high on an intraday basis (versus Close-only).

Pullbacks in a very strong gainer will tend to fall at or near a Fibonacci retracement of just 38 percent. The Fibonacci sequence for typical downside (or upside) retracements is 38, 50 and 62%. For the reason that the first retracement in this sequence is 38 percent, I tend to call this a 'minimal' retracement.

A RECENT EXAMPLE OF A MINIMAL DOWNSIDE RETRACEMENT:

2. Stocks or indices that have had more moderate or average gains in a bull market trend (those having advances falling between the strongest movers and the weakest), will tend to see a 'typical' pullback of around HALF or 50% of the prior run up.

A RECENT EXAMPLE OF AN 'AVERAGE' DOWNSIDE RETRACEMENT:

3. Stocks or indices that have had the weakest gains in a bull market trend, will often see pullbacks of around 62%, or a little bit more.

A 'LITTLE BIT' MORE:

WD Gann, a minor trading legend in the last century, used to talk about not just Fibonacci retracement levels, but retracements that were 1/3, 1/2 and 2/3rds of a prior price move. One of my personal favorite trading ploys so to speak, is to look for a retracement that falls a bit under 62% of a prior move in a lagging (to the Market) trend and gets to around 2/3rds or a 66% retracement of the prior advance in a bull market trend. 66% retracements of a bear market trend is common also.

A RECENT EXAMPLE OF A 'DEEP' DOWNSIDE RETRACEMENT:

CAVEATS TO THE ABOVE COMMON 'RULES OF RETRACEMENTS':

It's somewhat rare for retracements shown in the above examples seen in the Nasdaq 100 (NDX), S&P 500 (SPX) and the Dow 30 (INDU) to fall so EXACTLY at 38, 50 and 62/66 percent. It's not exactly UNcommon but retracements often fall BETWEEN 38 and 50%, or NEAR to 50% but not quite, or somewhat UNDER 50%; or, to between a 50 and 62% retracement.

Something I look for is, once a common retracement level is reached or is NEAR, what happens in terms of market action AFTER that. For example, is there a key upside price reversal in an overall bull trend; or key downside reversal in an overall bear trend once there's a 38, 50 or 62/66 retracement.

And/or, does the stock or index, after retracing one of the common percentage levels, ALSO get to an oversold extreme in a bull trend; or, reach an overbought extreme in the case of a bear market trend. This fact, along with the retracement of 38, 50 or 62/66%, may suggest a trend reversal even if that's only on a short to intermediate-term basis.


GOOD TRADING SUCCESS!